Evolution From Checks Takes Collaboration: Guest Opinion

The Federal Reserve has always kept a focus on the integrity, efficiency and accessibility of the payments system in the United States. We have largely pursued this mission in the context of our function as an operator in the interbank market.

Last October, I spoke at a conference about the Federal Reserve Banks’ strategic direction in payments. At the heart of the strategy is a vision to improve the end-to-end speed, efficiency, and safety of the U.S. payments system over the next decade. By end-to-end, I mean more than just interactions between banks; I mean from the point of payment origination to the point of receipt.

In the past year, we at the Federal Reserve Banks, completed an analysis of the gaps and opportunities in the U.S. payments system to understand key areas where the system could be enhanced. The purpose of the Payment System Improvement - Public Consultation Paper is to solicit broad, cross-industry input on the challenges facing the payments system and to identify possible next steps.

The gaps and opportunities we identified as we have pursued our strategic direction for financial services should come as no surprise; they are well known. First, there is still too much paper. While the share of check payments in the US has been declining for many years, it still represents almost 20% of all non-cash retail transactions, or 60 million transactions per day. America’s payments system is costlier as a result.

Next, we have not seen enough improvement in cross-border payments. Major drivers of cross-border payments are business-to-business transactions and remittances. The growth in cross-border business-to-business transactions is reflected in the value of imports and exports in the U.S. economy, which has risen by 40% to $4.2 trillion a year over the past decade. The value of remittance flows to developing countries has tripled to $351 billion annually over the same period. Yet, the options for cross-border payments have not kept pace. Opportunities exist for improving the cost-effectiveness, timeliness, and convenience of cross-border payments.

On the domestic front, the United States lacks a universal, near-real-time retail payments option for consumers and businesses. Cash and debit cards are the closest thing to it, but both fall short of fully satisfying business and consumer needs. We have heard from payments stakeholders that there is demand for a better system. At the same time, we are mindful of lessons learned in other countries that implementing a faster payments solution requires years of hard work.

It is pretty clear that future generations will not use paper checks. In fact, I would add that Millennials, as a group, are not currently using checks to any material degree. Future generations will also rely less than we do on cash, although I hasten to add that cash will remain widely used and widely accepted. Future generations will expect that any payment they initiate, whether online, mobile, or at point-of-sale, will be executed immediately. They will gravitate to financial institutions and other providers that offer this level of service.

Businesses and consumers alike have expressed interest in the ability to make last-minute payments of all types. Businesses and governments are drawn to the potential for enhanced cash management afforded by quicker confirmation of good funds. Real-time transactions could reduce fraud losses for banks and businesses. For consumers, a faster and more convenient electronic payments mechanism would be an attractive alternative to checks. As it stands, many consumers today believe that their payments are real-time.

Sandra Pianalto’s remarks were given at the Federal Reserve Bank of Chicago’ Payments Symposium in September. Republished with permission. She is president of the Federal Reserve Bank of Cleveland.